Such is the crisis surrounding the UK government’s Brexit strategy that Mark Dowding, co-head of developed markets at the asset manager BlueBay, says a general election, a suspension of Article 50, or a second referendum now appears a likely end-game. In other words, Brexit just may not happen.

But if it goes ahead on terms close to those laid out by prime minister Theresa May at Chequers, then the pleas of the banking sector have fallen on deaf ears and there will be a cost in terms of lost jobs and investment. Without passporting of financial services and relying instead on basic equivalence (the EU’s chief negotiator, Michel Barnier, has rejected the idea of an enhanced equivalence that is less easily withdrawn), we are currently looking at 'hard Brexit' for financial services.

So why have the concerns of the financial sector, ​which contributes 12% of the UK's GDP, been ignored?

There are a number of possible explanations. It could be that the thinking is that the UK needs to rebalance itself away from finance and get back to manufacturing. If so, it is a forlorn hope unless 3D printing comes along and saves advanced economies from the hollowing out of their economies. A strategy based on this premise is a huge gamble.It could be that the UK government believes the EU will not want to give up the cost and competitive advantages of having London as its financial centre and will agree a separate agreement for financial services. With the Swiss option of a sector-by-sector approach ruled out,​ this again seems unlikely.

Finally, is the focus on goods rather than services part of an over-clever negotiating strategy? The UK has a large trade deficit with the EU in goods so it is strongly to the EU’s advantage to agree to a free-trade deal for goods. But at some point in the negotiation money will come up. Will the UK try to broker access for services in return for ​ a budget contribution? Again, a big gamble.

These current proposals seem to be the worst of all worlds. By keeping the UK tied to the EU rulebook for goods, they inhibit the trade deals that could be done with third parties. By leaving services out in the cold they discriminate against the most dynamic parts of the UK economy. Being the classic compromise that pleases no one, the case for expecting the entire process to break down just got a whole lot stronger.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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